Why Wesfarmers Ltd Shares Fell Today

What happened to the Wesfarmers share price?

Shares of Wesfarmers Ltd [ASX:WES] lost over 2.3% today, following the release of their half-year results yesterday.

Why did WES shares fall?

Wesfarmers reported a net profit after tax increase of 13.2%. The top performers were Bunnings, Kmart and Officeworks. Yet Coles reported lower earnings, even though there were significant cost reductions.

Wesfarmers has placed Officeworks up for sale, along with their Curragh Bengalla coal mines, to get cash. According to the Sydney Morning Herald, the sale of these two assets could deliver Wesfarmers an inflow of more than $4 billion. They need the cash to defend Coles’ position in the highly-competitive grocery market. Yet this may not be enough.

Wesfarmers has seen increasing competition not only from archrival Woolworths [ASX:WOW], but from new entrant Aldi as well.

Supermarket wars could become fierce in the future, and it is not only Aldi’s expansion that is threatening Coles. Amazon may be entering the Australian market later this year with its own grocery chain. Amazon is planning to set up physical stores and deliver fresh food. The giant has declared that it will ‘destroy Australia’s retail environment’ by undercutting local prices by 30%.

Wesfarmers is also planning to spend $1 billion to roll out the Bunnings chain into the UK. They have taken over stores from British home improving retailer Homebase and will be rebranding them as Bunnings. Yet, since taking over Homebase, Bunnings has made a loss in the UK in its first six months.

What now for Wesfarmers Ltd?

Facing increased competition from Woolworths, Aldi and possibly Amazon, Wesfarmers’ boss John Durkan has declared that Coles will be ‘competitive forever’.

Yet investors need to decide if the company’s actions are increasing their competitive advantage, and whether Coles is in a position to win supermarket wars.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default.
Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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